Paying debt is one of things for which people work very hard, people work day and night so that they
could make enough money from which they could pay their debt and make a living. Whether it is a
mortgage or a student loan, people work hard to fulfill their dream of being debt free. People of United
States usually have 2 kind of big debts to deal with, one is the mortgage and the second is the Student
loan debt that has increased a lot in the recent years.
The topic of our today discussion is the question that many young people ask when they are free from
college and that is that whether they should pay their student loan first or they should start investing.
Usually debt is of considered to be of two types, the first one which is named as the good one is the one
that increases your net worth. Student loans and mortgages both lie in to the category of good debt, any
debt other than these two debts is considered to be a bad debt because that is a kind of trap that you
usually fall in. Purchasing a car does not increases your worth because the car loses its worth after
sometime and you end up in a loss situation. Bad debt usually come with a higher interest rate than of a
good debt so there is not a chance that you should invest money while you have bad debt on your
shoulders. You should first pay the bad debt first before you start investing.
In the case of good debt, the answer to the question is complicated and not clear and depends upon
your own preferences. Of course you need to pay your debt first and if you have bad debt then you
should not do anything before you pay that off. But investing while having a good debt also have some
benefits that you might want to enjoy. So to answer this question you need to consider some questions.
This would help you analyze which situation is better for you.
What is the Size of your Debt?
This is an important question to answer while you consider yourself stuck between paying off the
student loan and investing because if you have a lower amount then this could be better to start
investing but if you have a huge amount of debt then it would be better to get some load off. If you are
going to pay the debt first then try to pay the smallest one first because this would help you to get quick
success and you will get extra money to pay the other debt.
The interest rate that you have on your student loan is one of the factors which can change your
decision. If you have a higher interest rate on your student loan then it does not make sense to start
investing with a high interest loan on your shoulders. The loan could be increasing gradually and you will
have to pay more interest rate if you take the loan to its maximum. But if you have a loan of lower and
fixed interest rate then you can easily calculate what interest amount you will be paying for the life of
your loan. You can calculate that what profit investment can bring in and what savings you can do by
paying the debt early and then you can take a decision.
You can also refinance your high interest rate loan in to a lower interest rate loan with lower payments.
By this you will be able to save interest money and invest money too.
If you have a mortgage or a student loan you can apply for tax deduction programs and you can help
yourself to save the money that you would have to pay if you do not have a loan. In the case of student
loan, there is limitation that whether you can be eligible for this program or not. If your annual income is
more than the limit of the program and you still have the loan pending, then you would not be able to
get that tax deduction.
So in the case of student loans, finance experts always suggest that you should invest money first
because the amount of tax deductions in the case of student loans are lower than of in mortgages. And
if you invest, you can make more money.
Is Investing Before Paying Student Loan a Better Idea?
I have given some of the factors through which you can decide but according to me, investing money is
much better than putting all the money to pay off the student loan. When you start investing in a
younger age, you get a lot of investing experience and you can make a lot of profit in the upcoming time.
Having an investment account from a younger age is recommended by a lot of financial experts, so it is
better to start investing and then using the profit to pay off the debt.
You can also use 90% of your income to pay the debt and to make a living while you use the 10% to
investment account. By this you can get benefits from both these options.
Is Investing Before Paying Mortgage a Better Idea?
In my opinion paying off mortgage first has its own benefits, it can save you a thousand of dollars of
interest amount. Mortgages usually come for a longer period of time but if you can work hard, you can
pay it off quickly.
So the bottom line in this case is that you should put some portion of your income to pay off the debt
and some to invest. As I said above putting 10% of your income for investment is a much better option
in which you can enjoy benefits from both the sides. You will have to increase your principal payments
from the 90% of your income and the pay the debt quickly to. You can also work to increase your
income and keep the equation balance. Do comment in the section below and let us know if you have
any queries regarding the article because we would love to hear from you. Best of luck!